37688 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

1 International Organization of Securities

Commissions, Statement of the IOSCO Technical

Committee on Year 2000 (1997), available at http:/

/www.iosco.org.

2Release No. 34–39726, (March 5, 1998), 63 FR

12062 (March 12, 1998).

3SRO is defined in Section 3(a)(26) of the

Exchange Act, 15 U.S.C. 78c(a)(26).

4All comment letters and a summary of the

comments are available in File No. S7–8–98 at the

Commission’s Public Reference Room, 450 Fifth

Street, NW., Washington, DC 20549. The comment

period closed on April 27, 1998. See also Release

[FR Doc. 98–18292 Filed 7–10–98; 8:45 am]

BILLING CODE 8010–01–E

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 240

[Release No. 34–40163; File No. S7–8–98]

RIN 3235–AH42

Year 2000 Readiness Reports To Be

Made by Certain Transfer Agents

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

adopting Rule 17Ad–18 under the

Securities Exchange Act of 1934

(‘‘Exchange Act’’) to require certain

transfer agents to file with the

Commission two reports regarding their

Year 2000 compliance. The reports will

increase transfer agent awareness of the

specific steps they should be taking to

prepare for the Year 2000; help

coordinate industry testing and

contingency planning; supplement the

Commission’s examination module for

Year 2000 issues and identify potential

Year 2000 compliance problems; and

provide information regarding the

securities industry’s preparedness for

the Year 2000. The reports are designed

to be available to the public, which will

enable issuers and other parties to

assess the risks of doing business with

a transfer agent that may not be Year

2000 compliant.

EFFECTIVE DATE: August 12, 1998.

FOR FURTHER INFORMATION CONTACT: Jerry

W. Carpenter, Assistant Director, 202/

942–4187; Thomas C. Etter, Jr., Special

Counsel, 202/942–0178; or Jeffrey

Mooney, Special Counsel, 202/942–

4174, Division of Market Regulation,

Securities and Exchange Commission,

450 Fifth Street, NW., Mail Stop 10–1,

Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

At midnight on December 31, 1999,

unless the proper modifications have

been made, the program logic in many

of the vast majority of the world’s

computer systems will start to produce

erroneous results because, among other

things, the systems will incorrectly read

the date ‘‘01/01/00’’ as being January 1

of the year 1900 or another incorrect

date. In addition, systems may fail to

detect that the Year 2000 is a leap year.

Problems also can arise earlier than

January 1, 2000, as dates in the next

millennium are entered into non-Year

2000 compliant programs. Year 2000

Problems could have negative

repercussions throughout the world’s

financial systems because of the

extensive interrelationship and

information sharing between U.S. and

foreign financial firms and markets.1

The Commission views the Year 2000

problem as an extremely serious issue.

A failure to assess properly the extent of

the problem, remediate systems that are

not Year 2000 compliant, and then test

those systems could endanger the

nation’s capital markets and place at

risk the assets of millions of investors.

In light of this, both transfer agents and

the Commission are working hard to

address the industry’s Year 2000

Problems.

As part of its ongoing efforts relating

to the Year 2000 on March 5, 1998, the

Commission requested comment on

proposed Rule 17Ad–18 that would

require transfer agents to file at least one

report with the Commission regarding

its Year 2000 compliance.2 The

proposed rule noted that transfer agents

present special considerations for the

Commission because unlike other

entities regulated under the Exchange

Act transfer agents have no selfregulatory organization (‘‘SRO’’) to

assist them and the Commission in

addressing Year 2000 issues.3 Therefore,

the Commission’s only information from

non-bank transfer agents is directly from

the transfer agent themselves.

The Commission received 26

comment letters in response to the

proposed rule.4 The majority of the
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37689

No. 34–39859; (April 14, 1998), 63 FR 19430

(extending the comment period from April 13,

1998, to April 27, 1998).

5ARA is defined in Section 3(a)(34)(B) of the

Exchange Act, 15 U.S.C. 78c(a)(34)(B). Transfer

agents that are also banks have either the Board of

Governors of the Federal Reserve System, the Office

of the Comptroller of the Currency, or the Federal

Deposit Insurance Corporation as their ARA.

Approximately 1,360 transfer agents are registered

with the Commission, and the Commission is the

ARA for approximately 740 of them.

6 17 CFR 240.17Ad–13(d). Generally, the Rule

17Ad–13(d) exemption applies to issuer transfer

agents, small transfer agents exempt under Rule

17Ad–4(b), and bank transfer agents.

7 17 CFR 240.17Ad–6 and 17Ad.7.

8The attestation report would have only been

required to be filed with the follow-up reports.

9Letter from Alan W. Anderson, Senior VicePresident, Technical Services and Deborah D.

Lambert, Chair, Auditing Standards Board, AICPA

(April 13, 1998).

commenters generally supported the

spirit of the Commission’s proposed

rule with some commenters making

suggestions on how they believed one or

more aspects of the proposed rule could

be improved. However, the majority of

commenters objected to the requirement

for an independent accountant’s report

and objected to the Year 2000 reports

submitted by the transfer agents and

related accountant’s report being made

available to the public. Based on the

comments received, the Commission is

adopting the proposed rule with

changes discussed below.

II. Description of the Proposed Rule

The Commission proposed Rule

17Ad–18 to require non-bank transfer

agents to file at least one report with the

Commission regarding their Year 2000

compliance. Under the proposed rule, a

non-bank transfer agent was a transfer

agent whose appropriate regulatory

agency (‘‘ARA’’) was the Commission.5

Transfer agents that were also banks and

whose ARA was one of the federal

banking agencies would have been

exempt from the proposed rule. The

initial report would have been due no

later than 45 days after the Commission

adopted the rule. Non-bank transfer

agents that did not qualify for an

exemption under existing Rule 17Ad–

13(d) would have been required to

submit follow-up reports to the

Commission on August 31, 1998, and

August 31, 1999.6 The follow-up reports

also would have included an attestation

by an independent public accountant as

to whether there was a reasonable basis

for the non-bank transfer agent’s

assertions in the reports.

As noted in the proposed rule, the

Commission has advised all transfer

agents that if a transfer agent’s computer

systems have Year 2000 Problems, the

transfer agent’s record may be

inaccurate or not current and therefore

be in violation of Rules 17Ad–6 and

17Ad–7 under the Exchange Act.7

III. Discussion of Significant Issues

A. Reporting Threshold

The Office of Thrift Supervision

(‘‘OTS’’) requested that the Commission

extend the exemption in the proposed

rule for bank transfer agents to include

savings associations regulated by the

OTS. The OTS stated that savings

associations, unlike other non-bank

transfer agents, are subject to

comprehensive examinations by a

Federal banking agency, using the same

uniform examination standards

developed under the oversight of the

Federal Financial Institutions

Examination Council. The OTS also

noted that it is subject to similar

Congressional oversight on Year 2000

issues as the Commission and the other

Federal bank regulatory agencies. The

OTS believes that it would be

duplicative and inconsistent to require

savings associations to file the reports

with the Commission exempting banks

from the requirement.

The Commission agrees with the OTS.

Accordingly, the rule as adopted

excludes from its reporting

requirements transfer agents that are

savings associations regulated by the

OTS. Therefore the term ‘‘non-bank

transfer agent’’ used in the rule and in

the remainder of this release means a

transfer agent whose: (i) Appropriate

regulatory agency, as that term is

defined by 15 U.S.C. 78(c)(34)(B), is the

Commission; but (ii) is not a savings

association, as defined in Section 3 of

the Federal Deposit Insurance Act, 12

U.S.C. 1813, which is regulated by the

OTS. Because the Commission will

continue to be the ARA for these nonbank transfer agents, the Commission

will continue to consult with the OTS

about the results of their examinations.

B. Attestation Requirement

The proposed rule would have

required transfer agents that did not

qualify for an exemption under existing

Rule 17Ad–13(d) to make assertions

about their efforts to address Year 2000

problems and to engage an independent

public accountant to attest to their

assertions.8 As proposed, each non-bank

transfer agent would have been required

to assert:

(1) Whether it has developed written

plans for preparing and testing its

computer systems for potential Year

2000 Problems;

(2) Whether the board of directors, or

similar body, has approved these plans,

and whether a member of the non-bank

transfer agent’s board of directors, or

similar body, is responsible for

executing the plans;

(3) Whether its Year 2000 remediation

plans address all domestic and

international operations, including the

activities of its subsidiaries, affiliates,

and divisions;

(4) Whether it has assigned existing

employees, hired new employees, or

engaged third parties to execute its Year

2000 remediation plans; and

(5) Whether it has conducted internal

and external testing of its Year 2000

solutions and whether the results of

those tests indicate that the non-bank

transfer agent has modified its software

to correct Year 2000 problems.

The American Institute of Certified

Public Accountants (‘‘AICPA’’)

commented that the required attestation

report would be difficult for

independent public accountants to

provide.9 The AICPA explained that

some of the required assertions are not

appropriate for accountant attestation

because the assertions are not capable of

reasonably consistent measurement

against established criteria. Currently,

there are no established criteria related

to Year 2000 remediation efforts. The

lack of established criteria would likely

result in significant variation in the

examination procedures performed by

independent public accountants and

thus reduce the usefulness of the

attestation reports. In addition, the

AICPA expressed concern that the

purpose and conclusions of the

attestation report could be

misunderstood. The AICPA was

primarily concerned that uninformed

users of the attestation reports would

place undue reliance on them.

The AICPA suggested that an ‘‘agreedupon procedures’’ engagement, instead

of an attestation engagement, would

more effectively meet the Commission’s

goals. Pursuant to such an engagement,

non-bank transfer agents would engage

independent public accountants to

perform and to report on specific

procedures designed to meet the

Commissions objectives. This would

eliminate the variability of examination

procedures performed by independent

public accountants and thus increase

the consistency of the reports the

Commission would receive. The

AICPA’s letter outlined elements of an

agreed upon procedures report and

offered to follow-up with the

Commission staff regarding the

development of specific procedures for

a Year 2000 engagement.
37690 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

10 In light of the AICPA’s comment letter and

ongoing efforts, in a companion release also issued

today the Commission is re-opening the comment

period with respect to the proposal to have an

independent public accountant review a non-bank

transfer agent’s second Year 2000 report. The public

file (No. S7–8–98) will include both the AICPA’s

original comment letter and any follow-up letter

submitted by the AICPA for the Commission’s

consideration.

11This includes whether the transfer agent has

assigned existing employees, has hired new

employees, or has engaged third parties to provide

assistance in avoiding Year 2000 Problems.

12These stages are: (i) awareness of potential Year

200 Problems; (ii) assessment of what steps must be

taken to avoid Year 2000 Problems; (iii)

implementation of the steps needed to avoid Year

2000 Problems; (iv) internal testing of software

designed to avoid Year 2000 Problems; (v)

integrated or industry-wide testing of software

designed to avoid Year 200 Problems (including

testing with other transfer agents, other financial

institutions, customers, and vendors); and (vi)

implementation of tested software that will avoid

Year 2000 Problems.

13Contingency planning should provide for

adequate protections to ensure the success of

critical systems is interfaces fail or unexpected

problems are experienced with operating systems

and infrastructure software. In addition,

contingency plans should provide for the failure of

external systems that interact with the transfer

agents’ computer systems. For example,

contingency plans should anticipate the failure of

a vendor that services mission critical applications

and should provide for the potential that a

significant customer experiences difficulty due to

Year 2000 problems.

The Commission is deferring

consideration of whether to adopt a

requirement that the second report be

evaluated by an independent public

accountant. The Commission, however,

will consider such a requirement if the

accounting industry recommends a

standard which can be used by public

accountants in connection with the

second report.10

C. Public Availability

In the proposed rule, the Commission

expressed its preliminary view that it

should make publicly available nonbank transfer agent reports regarding

their Year 2000 remediation efforts.

Certain commenters expressed the

following concerns: (i) Members of the

public could place undue reliance on

the reports, (ii) the technical nature of

the reports may confuse investors, (iii)

detailed testing reports could be

misleading and unnecessarily alarming,

and (iv) the reports could contain

confidential proprietary information.

However, the Commission believes

that the public’s interest is best served

by requiring full and open disclosure.

Allowing the public, particularly other

non-bank transfer agents and

counterparties, to have access to the

information reported by non-bank

transfer agents will enable interested

persons to assess the Year 2000

readiness of a non-bank transfer agent

with which they are doing business. For

example, after receiving a non-bank

transfer agent’s report, an issuer might

request additional information or

assurances if the non-bank transfer

agent does not appear to be taking the

steps necessary to be Year 2000

compliant. In the absence of such

assurances, the issuer could determine

whether it wishes to continue its

dealings with that non-bank transfer

agent. Accordingly, the final rule

provides that these reports will be

available to the public.

D. Timing

Under the proposed rule, the initial

report would have evaluated the efforts

of non-bank transfer agents as of

December 31, 1997, and would have

been required to be filed no later than

45 days after the Commission adopted

the proposed rule. The follow-up

reports would have evaluated non-bank

transfer agent efforts as of June 30, 1998

and June 30, 1999, and would have been

due August 31, 1998, and August 31,

1999, respectively.

Some commenters expressed concerns

about making reports based on old data.

These commenters explained that nonbank transfer agents might not have

retained the information needed to

prepare the reports and would require

non-bank transfer agents to provide data

that was outdated and misleading.

In light of these concerns, the rule

adopted today by the Commission

requires non-bank transfer agents to file

the initial report with the Commission

by August 31, 1998. This report should

reflect the status of the non-bank

transfer agent’s Year 2000 efforts as of

July 15, 1998. The rule requires transfer

agents to submit only one follow-up

report, which must be filed with the

Commission by April 30, 1999, and

should reflect the status of the transfer

agent’s Year 2000 efforts as of March 15,

1999.

The rule adopted today also requires

a non-bank transfer agent whose

registration with the Commission

becomes effective between the adoption

of this rule and December 31, 1999, to

file Part I of Form TA–Y2K with the

Commission no later than 30 days after

their registration becomes effective

describing their Year 2000 compliance

as of the date of their registration. New

transfer agents whose registration with

the Commission becomes effective

between January 1, 1999, and April 30,

1999, would be required to file the

second report due on April 30, 1999.

E. Reporting Requirements

As previously discussed, the

proposed rule would have required

certain non-bank transfer agents to

discuss the steps they have taken to

address Year 2000 Problems. More

specifically, non-bank transfer agents

would have been required to (i) indicate

whether their board of directors or

similar body has approved and funded

written Year 2000 remediation plans

that address all major computer

systems; (ii) describe their Year 2000

staffing efforts and the work performed

by Year 2000 dedicated staff;11 (iii)

discuss their progress on each stage of

preparation for the Year 2000;12 (iv)

indicate if they have written

contingency plans to deal with Year

2000 problems that may occur;13 and (v)

identify what levels of management are

responsible for Year 2000 remediation

efforts.

One commenter suggested certain

changes to the specific reporting

requirements to better clarify the

information sought by the Commission.

For example, the proposed rule would

have required non-bank transfer agents

to discuss the extent to which it has

assigned existing employees, or engaged

third parties in the Year 2000 effort. In

addition, non-bank transfer agents

would have been required to identify

the levels of management involved in

the Year 2000 efforts, discuss the

specific responsibilities of these

managers, and provide an estimate of

the time they have spent on Year 2000

efforts. The commenter explained that

these proposed requirements may be

very burdensome, particularly for those

firms that have comprehensive,

complex-wide Year 2000 plans. Fixing

Year 2000 problems may require the

dedicated efforts of a significant number

of employees and consultants. In

addition, the tasks and responsibilities

involved are detailed, extensive, and

constantly changing.

The Commission agrees that some

modification and clarification of the

reporting requirements is warranted.

The rule adopted today requires nonbank transfer agents to provide a

summary of the efforts of individuals or

groups of individuals assigned to work

on the Year 2000 Problem. The nonbank transfer agent will not have to

provide an estimate of the time that its

management has spent on Year 2000

efforts. Finally, the non-bank transfer

agent must report the number and

description of material exceptions

identified during the internal and

external testing of its software that are

unresolved as of the report date. The

Commission is leaving the

determination of what constitutes a
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations 37691

14For a copy of Form TA–Y2K see Appendix A.

15 15 U.S.C. 78W (A)(2).

16U.S.C. 78c.

17Field tests of Part I of Form BD–Y2K indicated

that it could be completed in as little as 30 minutes.

However, the Commission believes that it may take

longer for some broker-dealers to complete Part I of

Form BD–Y2K.

material exception to the non-bank

transfer agent’s judgment.

F. Report Format

The proposed rule would have

required certain non-bank transfer

agents to discuss, in narrative format,

their efforts to address Year 2000

Problems. The National Association of

Securities Dealers Regulation

(‘‘NASDR’’) commented that the

Commission should prescribe an

objective format, such as a check-thebox questionnaire, for non-bank transfer

agents to use when reporting on their

Year 2000 efforts. The NASDR

explained that an open narrative format

might lead to great disparity in the

nature and detail of the reports the nonbank transfer agents would submit.

Providing an objective reporting format

would produce consistent results,

improve the accuracy and comparability

of reports received, and reduce the time

required to summarize, track, analyze,

and report the information received.

The Commission agrees that the

checklist format suggested by the

NASDR may be a more efficient way of

collecting certain information and

believes that prescribing such a format

would decrease the burden the Year

2000 reporting requirements impose on

non-bank transfer agents. However, the

Commission is concerned that by

limiting the reporting requirements to a

check-the-box format, the largest, most

significant non-bank transfer agents

would not provide the Commission with

sufficient information to effectively

assess Year 2000 problems. Therefore,

the rule as adopted requires all nonbank transfer agents to file with the

Commission Part I of Form TA–Y2K, a

check-the-box style report.14 Part I of

Form TA–Y2K requires non-bank

transfer agents to provide generally the

same information as the proposed rule

would have required to be submitted in

narrative form. However, non-bank

transfer agents that do not qualify for an

exemption under Rule 17Ad–13(d) will

be required to supplement Part I by

completing Part II of Form TA–Y2K,

which requires a narrative discussion of

their efforts to address Year 2000

Problems. Because Rule 17Ad–13(d)

generally exempts small transfer agents

or issuer transfer agents that typically

handle few issues, the potential that

these transfer agents could disrupt the

clearance and settlement process is not

as likely as larger transfer agents that

process more issues for more issuers.

Copies of Form TA–Y2K are available

in the Commission Public Reference

Room located at 450 Fifth Street, NW,

Washington DC 20549 or copies can be

obtained from the Commission’s

internet web site at the following

address: www.sec.gov.

IV. Costs and Benefits of the Rules and

Their Effects on Competition,

Efficiency, and Capital Formation

Section 23(a) of the Exchange Act 15

requires the Commission, in adopting

rules under the Exchange Act, to

consider the competitive effects of such

rules and to not adopt a rule that would

impose a burden on competition not

necessary or appropriate in furtherance

of the purposes of the Exchange Act.

Furthermore, Section 3(f) of the

Exchange Act 16 provides that whenever

the Commission is engaged in

rulemaking and is required to consider

or determine whether an action is

necessary or appropriate in the public

interest, the Commission also shall

consider, in addition to the protection of

investors, whether the action will

promote efficiency, competition, and

capital formation.

The Commission has considered the

amendments to Rule 17Ad–18 in light of

the standards cited in Sections 3 and 23

(a)(2) of the Exchange Act. In the

proposed rule, the Commission

requested that commenters provide

analysis and data supporting the costs

and benefits of the proposed rule. In

addition, the Commission sought

comments on the proposed rule’s effect

on competition, efficiency, and capital

formation.

Several commenters indicated that the

Commission’s cost estimates were too

low. However, no commenters provided

detailed information or data as to the

costs of the proposed rule. One

commenter questioned whether the

additional regulations and their expense

will generate greater preparedness and

compliance or whether they would be a

greater distraction and misdirect the

focus from Year 2000 preparations.

Another commenter noted that the

Division of Market Regulation has

already requested information from each

transfer agent regarding its Year 2000

preparations. Therefore, the commenter

believed that the proposed rule was

duplicative. Another commenter

suggested that instead of the proposed

rule the Commission should issue an

interpretive release under Rule 17Ad–13

that provided standards for transfer

agent Year 2000 programs.

Two commenters believed that

preparation of the reports required by

the proposed rule was not costly or

difficult. One of these commenters

suggested that all transfer agents,

regardless of size or being regulated by

other authorities, should provide the

reports required by the proposed rule.

Three commenters suggested that the

Commission also should require transfer

agents to obtain certifications from their

vendors. No commenter addressed the

issue of whether the proposed rule

would affect competition or regarding

the proposed rule’s affect on efficiency

and capital formation.

A. Cost Benefit Analysis

Based on comments received, the

Commission has revised the proposed

rule to lower the aggregate cost of

compliance with the rule. As discussed

above, the Commission is adopting new

Form TA–Y2K, eliminating one of the

reporting dates, and expanding the

reporting requirement for certain nonbank transfer agents. Under the final

rule, all non-bank transfer agents are

required to file Part I of Form TA–Y2K,

a less burdensome check-the-box report,

twice. The proposed rule required an

initial report from all non-bank transfer

agents and two follow-up reports from

those non-bank transfer agents that did

not qualify for an exemption under Rule

17Ad–13(d). Under the final rule, each

non-bank transfer agent that does not

qualify for an exemption under Rule

17Ad–13(d) is also required to complete

Part II of Form TA–Y2K.

The Commission is also deferring

consideration of whether to require nonbank transfer agents to engage

accountants to examine their efforts to

address Year 2000 Problems. The

Commission is allowing non-bank

transfer agents to summarize by group

the efforts of Year 2000 dedicated

individuals as opposed to requiring

individual descriptions of their efforts.

Non-bank transfer agents will not have

to provide an estimate of the time

management has spent on Year 2000

efforts. Finally, non-bank transfer agents

are only required to report the number

and description of unresolved material

exceptions identified during the internal

and external testing of their software.

Based on field testing of a virtually

identical form, Form BD–Y2K,

conducted by the Office of Compliance

Inspections and Examinations, the

Commission estimates that on average a

non-bank transfer agent will spend

approximately two hours completing

Part I of Form TA–Y2K resulting in a

total cost to the industry of $296,000.17

This is based on 740 respondents
37692 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 /Rules and Regulations

18 17 CFR 240.0–10.

spending four hours at $100 per hour

preparing two Part Is of Form TA–Y2K.

The Commission estimates that on

average a non-bank transfer agent will

spend 35 hours completing Part II of

Form TA–Y2K resulting in a total cost

to the industry of $1,400,000. This is

based upon 200 non-bank transfer

agents spending 70 hours at $100 per

hour preparing two Part IIs of Form TA–

Y2K. Therefore, based upon the

adjustments to the proposed rule, the

Commission has revised its cost to the

industry to a total of $1,696,000

($296,000 + $1,400,000). It is important

to note that the total cost estimate is not

an annual cost. Non-bank transfer agents

will only be required to prepare and file

two Form TA–Y2Ks.

No commenters addressed the

potential benefits of the rule and the

Commission has not been able to

quantify those benefits. However, the

Commission believes that the benefits

will outweigh the costs. The

Commission is aware of the significant

effort the securities industry has put

forth and the progress its has made, but

believes that significant progress still

needs to be made by the securities

industry to be ready for the Year 2000.

As noted above, because transfer agents

do not have an SRO, the only available

information is from the transfer agents

themselves.

The Commission does not yet have

comprehensive information regarding

the readiness of the transfer agent

industry for the Year 2000. While the

federal banking agencies are examining

bank transfer agents, it is important for

the Commission to obtain complete

information from non-bank transfer

agents to permit the Commission to

assess the risks associated with nonbank transfer agents that fail to show

adequate Year 2000 progress. Moreover,

the Commission believes that a

requirement to file Year 2000 reports

should encourage non-bank transfer

agents to proceed expeditiously with

their efforts to prepare for the Year

2000. The Commission will use the

reported information to obtain a more

complete picture of the industry’s

overall Year 2000 preparations and to

identify transfer agent-specific and

industry-wide problems. Information in

the reports will help the Commission

focus its Year 2000-related efforts for the

rest of 1998 and 1999 on particular

industry segments or non-bank transfer

agents that appear to pose the greatest

risk of non-compliance.

In sum, the rule will enable the

Commission to take a more active role

in assessing the Year 2000 risk to the

securities industry. The reports nonbank transfer agents will be required to

file will increase transfer agent

awareness that they should be taking

specific steps now to prepare for the

Year 2000; help coordinate industry

testing and contingency planning;

supplement the Commission’s

examination module for Year 2000

issues; provide information regarding

the securities industry’s preparedness

for the Year 2000; and (iv) enable the

Commission to identify particular

compliance problems.

B. Efficiency, Competition, and Capital

Formation

In the proposing release, the

Commission stated that the proposed

rule should not unduly burden

competition. No commenter addressed

the proposed rule’s effect on

competition.

The Commission believes that it has

drafted Rule 17Ad–18 so as to minimize

their impact on competition. As

discussed above, the Commission has

structured the form of the report to

differentiate between non-bank transfer

agents based upon the threat they would

pose to customers and the market if they

are not Year 2000 compliant. As

discussed above, non-bank transfer

agents that qualify for an exemption

under Rule 17Ad–13(d) (i.e., small

transfer agents and issuer transfer

agents) are only required to file the less

burdensome Year 2000 report. Larger

non-bank transfer agents that provide

services for multiple issuers do not

qualify for an exemption and are

required to provide additional

information. The Commission believes

that Rule 17Ad–18 does not impose any

burden on competition not necessary or

appropriate in furtherance of the

Exchange Act.

The Commission believes that the rule

should increase the efficiency and

effectiveness of the industry’s efforts to

prepare for the Year 2000 by increasing

awareness, focusing industry efforts,

and providing critical information for

identifying and remedying problems. In

addition, the Commission believes that

the rule does not adversely affect capital

formation. However, failure on the part

of the securities industry to adequately

prepare for the Year 2000 could

adversely affect capital formation at the

beginning of the next millennium.

V. Final Regulatory Flexibility Analysis

A final Regulatory Flexibility

Analysis (‘‘FRFA’’) concerning Rule

17Ad–18 has been prepared in

accordance with the provisions of the

Regulatory Flexibility Act (‘‘RFA’’), as

amended by Pub. L. 104–121, 110 Stat.

847, 864 (1996), 5 U.S.C. 604. The FRFA

notes that Rule 17Ad–18 will increase

transfer agent awareness of the specific

steps they should be taking to prepare

for the Year 2000; help coordinate

industry testing and contingency

planning; supplement the Commission’s

examination module for Year 2000

issues and identify potential Year 2000

compliance problems; and provide

information regarding the securities

industry’s preparedness for the Year

2000.

The Commission received no

comments on the Initial Regulatory

Flexibility Analysis (‘‘IRFA’’) prepared

in connection with the proposed rule,

and no comment letters specifically

addressed the IRFA. However, as

discussed in paragraph III.A above,

certain commenters expressed concern

about the threshold for determining

which non-bank transfer agents are

required to report on their efforts to

prepare for the Year 2000, and estimated

costs associated with obtaining the

independent public accountant’s

attestation.

As discussed more fully in the FRFA,

the rule will affect transfer agents that

are small entities pursuant to Rule 0–10

under the Exchange Act.18 When used

with reference to a transfer agent, the

Commission has defined the term

‘‘small entity’’ to mean a transfer agent

that: (1) received less than 500 items for

transfer and less than 500 items for

processing during the preceding six

months (or in the time that it has been

in business, if shorter); (2) maintained

master shareholder files that in the

aggregate contained less than 1,000

shareholder accounts or was the named

transfer agent for less than 1,000

shareholder accounts at all times during

the preceding fiscal year (or in the time

that it has been in business, if shorter);

and (3) is not affiliated with any person

(other than a natural person) that is not

a small business or small organization

under Rule 0–10. Approximately 413

registered transfer agents qualify as

‘‘small entities’’ for purposes of the

RFA.

The Commission has drafted Rule

17Ad–18 to minimize its impact on

small transfer agents while enhancing

investor protection and minimizing any

impact on competition, in part, by

adopting different reporting

requirements to take into account the

resources available to small non-bank

transfer agents. First, small bank transfer

agents are not required to submit any

reports. Second, while the rule requires

all non-bank transfer agents to report on

their efforts to address Year 2000

problems, the Commission has adopted

two reporting formats. Small non-bank
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19 44 U.S.C. 3501 et seq.

transfer agents are only required to file

a less burdensome check-the-box style

Year 2000 report. As noted in section

IV.A above, the Commission estimates

that it would take each non-bank

transfer agent approximately four hours

to complete Part I of Form TA–Y2K. The

remaining non-bank transfer agents are

required to provide, in addition to the

check-the-box style report, a more

extensive narrative discussion of their

Year 2000 efforts. These non-bank

transfer agents are typically larger

transfer agents that process multiple

issues and could potentially have a

greater impact on the clearance and

settlement system. Thus, by adopting

different reporting requirements and by

exempting small bank transfer agents,

the Commission has imposed no

burden, or only a very limited burden,

on small transfer agents.

The FRFA notes that it would be

difficult to further simplify, consolidate,

or adjust compliance standards for small

non-bank transfer agents and be able to

effectively monitor the securities

industry’s efforts to prepare for the Year

2000. The Commission believes that the

alternate reporting requirement adopted

today for small non-bank transfer agents

strikes the appropriate balance between

the need to protect investors and to

minimize any impact on small non-bank

transfer agents. The Commission also

considered the use of performance

rather than design standards. However,

the Commission concluded that it

would be inconsistent with the purpose

of the rule to use performance standards

to specify different requirements for

small entities.

A copy of the FRFA may be obtained

by contacting Jeffrey Mooney, Special

Counsel, U.S. Securities and Exchange

Commission, Mail stop 10–1, 450 Fifth

Street, NW., Washington, DC 20549.

VI. Paperwork Reduction Act

As set forth in the proposed rule, Rule

17Ad–18 contains collections of

information within the meaning of the

Paperwork Reduction Act of 1995

(‘‘PRA’’).19 Accordingly, the collection

of information requirements were

submitted to the Office of Management

and Budget (‘‘OMB’’) for review and

were approved by OMB which assigned

the following control number 3235–

0512.

The proposed rule solicited comments

on the proposed collections of

information. No comments were

received that specifically addressed the

PRA submission. However, as discussed

above, the Commission received

suggestions that would improve the

collections of information. Based upon

these suggestions, the collections of

information have been adjusted as

described in section III. above. For

example, the rule adopted today

requires non-bank transfer agents to

provide a summary of the efforts of

individuals or groups of individuals

assigned to work on the Year 2000

Problem, and the reports will not have

to provide an estimate of the time

management has spent on Year 2000

efforts, nor the number and nature of

material exceptions identified during

the internal and external testing of its

software.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the agency displays a valid OMB

control number. The collection of

information under Rule 17Ad–18 is

necessary for non-bank transfer agents

to comply with certain requirements

and is necessary to provide the

Commission with information on the

security industry’s readiness for the

Year 2000. The information collected

pursuant to Rule 17Ad–18 will be made

public.

Based upon the adjustments to the

amendments, the Commission is

adjusting its burden estimate. The

Commission estimated in the proposed

rule that, on average, a non-bank

transfer agent would spend 50 hours

preparing each of the three Year 2000

reports and obtaining the two

independent public accountant’s

Attestations. The Commission estimates

that under the final amendments, a nonbank transfer agent will, on average,

spend two hours preparing Part I of

Form TA–Y2K and 35 hours preparing

Part II of Form TA–Y2K. The total

annualized burden to the securities

industry is estimated at 8,480 hours.

This is based on 740 respondents

spending two hours preparing Part I and

200 respondents preparing Part II of

Form TA–Y2K.

VII. Statutory Analysis

Pursuant to the Securities Exchange

Act of 1934 and particularly Sections

17(a) and 23(a) thereof, 15 U.S.C.

78o(c)(3) and 78w, the Commission is

adopting amendments to § 240.17Ad–18

of Title 17 of the Code of Federal

Regulations in the manner set forth

below.

List of Subjects in 17 CFR Parts 240 and

249

Broker-dealers, Reporting and

recordkeeping requirements, Securities.

Text of Final Rule

In accordance with the foregoing,

Title 17, chapter II, part 240 of the Code

of Federal Regulations is amended as

follows:

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

1. The authority citation for part 240

continues to read in part as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt,

78c, 78d, 78f, 78i, 78j, 78j–1, 78k, 78k–1, 78l,

78m, 78n, 78o, 78p, 78q, 78s, 78u–5, 78w,

78x, 78ll(d), 78mm, 79q, 79t, 80a–20, 80a–23,

80a–29, 80a–37, 80b–3, 80b–4 and 80b–11,

unless otherwise noted.

* * * * *

2. By adding § 240.17Ad–18 to read as

follows:

§ 240.17Ad–18 Year 2000 Reports to be

made by certain transfer agents.

(a) Each registered non-bank transfer

agent must file Part I of Form TA–Y2K

(§ 249.619 of this chapter) with the

Commission describing the transfer

agent’s preparation for Year 2000

Problems. Part I of Form TA–Y2K shall

be filed no later than August 31, 1998,

and April 30, 1999. Part I of Form TA–

Y2K shall reflect the transfer agent’s

preparation for the Year 2000 as of July

15, 1998, and March 15, 1999,

respectively.

(b) Each registered non-bank transfer

agent, except for those transfer agents

that qualify for the exemption in

paragraph (d) of § 240.17Ad–13, must

file with the Commission Part II of Form

TA–Y2K (§ 249.619 of this chapter) in

addition to Part I of Form TA–Y2K. Part

II of Form TA–Y2K report shall address

the following topics:

(1) Whether the board of directors (or

similar body) of the transfer agent has

approved and funded plans for

preparing and testing its computer

systems for Year 2000 Problems;

(2) Whether the plans of the transfer

agent exist in writing and address all

mission critical computer systems of the

transfer agent wherever located

throughout the world;

(3) Whether the transfer agent has

assigned existing employees, has hired

new employees, or has engaged third

parties to provide assistance in

addressing Year 2000 Problems; and if

so, a description of the work that these

groups of individuals have performed as

of the date of each report;

(4) The current progress on each stage

of preparation for potential problems

caused by Year 2000 Problems. These

stages are:

(i) Awareness of potential Year 2000

Problems;
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(ii) Assessment of what steps the

transfer agent must take to address Year

2000 Problems;

(iii) Implementation of the steps

needed to address Year 2000 Problems;

(iv) Internal testing of software

designed to address Year 2000

Problems, including the number and

description of the material exceptions

resulting from such testing that are

unresolved as of the reporting date;

(v) Point-to point or industry-wide

testing of software designed to address

Year 2000 Problems (including testing

with other transfer agents, other

financial institutions, and customers),

including the number and description of

the material exceptions resulting from

such testing that are unresolved as of

the reporting date; and

(vi) Implementation of tested software

that will address Year 2000 Problems;

(5) Whether the transfer agent has

written contingency plans in the event

that, after December 31, 1999, it has

computer problems caused by Year 2000

Problems; and

(6) What levels of the transfer agent’s

management are responsible for

addressing potential problems caused

by Year 2000 Problems, including a

description of the responsibilities for

each level of management regarding the

Year 2000 Problems;

(7) Any additional material

information in both reports concerning

its management of Year 2000 Problems

that could help the Commission assess

the transfer agent’s readiness for the

Year 2000.

(8) Part II of Form TA–Y2K (§ 249.619

of this chapter) shall be filed no later

than August 31, 1998, and April 30,999.

Part II of Form TA–Y2K shall reflect the

transfer agent’s preparation for the Year

2000 as of July 15, 1998, and March 15,

1999, respectively.

(c) Any non-bank transfer agent that

registers between the adoption of the

final rule and December 31, 1999, must

file with the Commission Part I of Form

TA–Y2K (§ 249.619 of this chapter) no

later than 30 days after their registration

becomes effective. New transfer agents

whose registration with the Commission

becomes effective between January 1,

1999, and April 30, 1999, would be

required to file the second report due on

April 30, 1999.

(d) For purposes of this section, the

term Year 2000 Problem shall include

problems arising from:

(1) Computer software incorrectly

reading the date ‘‘01/01/00’’ as being the

year 1900 or another incorrect year;

(2) Computer software incorrectly

identifying a date in the Year 1999 or

any year thereafter;

(3) Computer software failing to detect

that the Year 2000 is a leap year; or

(4) Any other computer software error

that is directly or indirectly caused by

paragraph (d)(1), (2), or (3) of this

section.

(e) For purposes of this section, the

term non-bank transfer agent means a

transfer agent whose:

(1) Appropriate regulatory agency, as

that term is defined by 15 U.S.C.

78(c)(34)(B), is the Securities and

Exchange Commission; and

(2) Is not a savings association, as

defined by Section 3 of the Federal

Deposit Insurance Act, 12 U.S.C. 1813,

which is regulated by the Office of

Thrift Supervision.

PART 249—FORMS, SECURITIES

EXCHANGE ACT OF 1934

3. The authority citation for part 249

continues to read in part as follows:

Authority: 15 U.S.C. 78a, et seq., unless

otherwise noted;

* * * * *

4. By adding § 249.619 and Form TA–

Y2K to read as follows.

§ 249.619 Form TA–Y2K, information

required of transfer agents pursuant to

section 17 of the Securities Exchange Act

of 1934 and § 240.17Ad–18 of this chapter.

This form shall be used by every

registered transfer agent required to file

reports under § 240.17Ad–18 of this

chapter.

Note: Form TA–Y2K does not appear in the

Code of Federal Regulations. Form TA–Y2K

is attached as Appendix A to this document.

By the Commission.

Dated: July 2, 1998.

Margaret H. McFarland,

Deputy Secretary.

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[FR Doc. 98–18296 Filed 7–10–98; 8:45 am]

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